Robitaille v. R., [1998] 1 CTC 2761

Lamarre Proulx T.C.J.:

The appellant is appealing under the informal procedure from reassessments made by the Minister of National Revenue (“the Minister”) for the 1990, 1991 and 1992 taxation years.

The issue is whether payments to third parties were made in accordance with s. 60.1(1) or (2) of the Income Tax Act (“the Act”) and so were deductible in calculating the appellant’s income.

The facts on which the Minister relied in making these reassessments are set out in Paragraph 8 of the Reply to the Notice of Appeal (“the Reply”) and are as follows:

[TRANSLATION]

(a) the appellant and Louise Tardif were divorced during the 1990, 1991 and 1992 taxation years;

(b) on July 26, 1989, delivering the divorce judgment between the appellant and Ms. ‘Tardif, the Court approved the consent between the parties, signed by them on that date, regarding corollary relief, and ordered the parties to abide by it;

(c) the consent between the parties dated July 26, 1989 provided in Clause 1 that the appellant’s ex-wife would have custody of the three minor children, Charles-Antoine, Olivier and Solene, and that any important decision regarding the children would be made by the parties jointly; (d) the said consent further provided in Clause 7 that as a general and final lump sum, the appellant would pay Louise Tardif $15,000 by a payment equivalent to the mortgage payment on the family home until the said sum is exhausted;

(e) the said consent further mentioned in Clause 13 that the appellant would pay $1,200 a month as alimony for the children;

(f) the said consent also noted in Clause 14 that the appellant would further pay Louise Tardif, after prior consultation and approval, the children’s expenses for playing sports, including sports equipment, their registration at summer camps, dental expenses and school fees;

(g) despite the Minister’s request, the appellant did not provide all the supporting documentation relating to all deductions claimed in his return for 1990, 1991 and 1992;

(h) the amounts claimed by the appellant but disallowed for the 1990, 1991] and 1992 taxation years represented amounts paid to third parties...

Paragraph 4 of the Reply sets out the amounts the appellant deducted in calculating his income for the years in question and the amounts allowed by the Minister:

[TRANSLATION]

4. On June 20, 1994, by a notice of reassessment for the 1990, 1991 and 1992 taxation years, the Minister reduced by $22,316, $10,459 and $9,482 respectively the amount deductible by the appellant as alimony for each of the years, changing it from $34,168 to $11,852 for 1990, from $24,299 to $13,840 for 1991 and from $18,782 to $9,300 for 1992.

At the start of the hearing the appellant requested an adjournment on the ground that his ex-wife, whom he asked to testify and who had told him she would come, was not present. He said that he planned to have her testify by means of a subpoena. The Court denied the request for adjournment on the basis of lateness and lack of the diligence that a person appearing in court should exercise. Further, the Court doubted that the ex-wife’s testimony would be very useful since there has to be a court order or a prior written agreement between the parties in cases involving alimony or payments similar to alimony.

The appellant, a notary, admitted subparagraphs 8(a) to (f) of the Reply. He denied subparagraphs 8(g) and (h) of the Reply, explaining to the Court that as he understood the reasons which prompted the Minister’s officers to assess him, it was not because he could not provide documentation for the expenses mentioned in subparagraph 8(f) of the Reply, but because the payments had been made to third parties and not to his ex-wife. The expenses claimed concerned school fees and the cost of extracurricular activities, as well as registration in summer camps. The bills seem to have been made out in the appellant’s name.

Exhibit A-1 is a divorce judgment dated July 26, 1989. That judgment approved the consent on accessory measures made between the parties, which is Exhibit A-2. The agreement on accessory measures is also dated July 26, 1989. Clauses 13 and 14 of that agreement read as follows:

[TRANSLATION]

13. The defendant will pay the plaintiff the sum of $1,200 a month as alimony for the children, commencing on August 1, 1989, as long as they are studying and residing with their mother;

14. The defendant will further pay the plaintiff, after prior consultation and approval, the children’s expenses for playing sports, including sports equipment, their registration at summer camps, dental expenses and school fees; expenses relating to holidays spent with either parent will be the latter’s responsibility...

The payments made under Clause 13 were deducted in calculating the appellant’s income and are not at issue in the instant case. It is the payments made under Clause 14 which are at issue.

This is how the appellant explains the matter in his Notice of Appeal:

[TRANSLATION]

under Clause 13! [1] [sic], certain other amounts relating to other expenses for the children, including amounts which could vary depending on what she chooses, such as school fees, dental expenses, registration at summer camps and expenses for playing sports, all depending on the registrations and decisions taken from time to time by her;

Some weeks after the divorce, she asked him to pay the aforementioned expenses directly to third parties, and in particular the school and summer camps, as she said she did not want to [TRANSLATION] “pay these expenses’’, alleging she had a tight budget, and did not have the resources to pay such large amounts and then wait for repayment.

This request by her was agreed to by the appellant, who in due course directly paid the third parties concerned, at her request or on receipt of bills sent by her or at her request, the amounts mentioned in clause 13 [sic], and he was further prompted to do this by the fact that certain amounts which he had given her to pay certain expenses, in particular some which were owed to third parties, had not been paid to the third parties in question, and they were now claiming payment from him.

Although she was supposed to consult him on all matters of importance concerning the children, she took nearly all decisions regarding the children by herself, simply telling him after the fact, and the receipt of a bill was often the first news he had of this or that decision by her, such as registration in a school or summer camp, sports activities and so on.

At the hearing, the appellant testified to the same effect.

The appellant filed a further exhibit, namely an agreement subsequent to the divorce, dated March 28, 1994, as Exhibit A-4. He referred to Clause 3 to indicate that his ex-wife agreed that the payments made to third parties for the children were in the years in question subject to deduction on the one hand and inclusion on the other. This clause read as follows:

[TRANSLATION]

3 - Custody of the two sons, Charles-Antoine and Olivier, is awarded to the father, who will be directly responsible on their behalf for school fees, dental expenses and expenses associated with sports, so that such costs will no longer be deductible and/or taxable for one or the other. The custody of and responsibility for Solene are awarded to the mother, who will pay all the child’s expenses except for school fees, dental expenses and expenses relating to sports, which will be paid directly by the father to whomever it may concern.

On this argument, I would say at once that it is the provisions of the Act which determine deduction and inclusion, not the statements by the parties. The case must be decided in accordance with the provisions of the Act. Further, the statement in Clause 3 cannot in any way be regarded as an admission by the ex-wife, and such an admission would in any case have no bearing on the outcome of the instant case.

The appellant indicated that the payments which should have been made to his ex-wife were made to third parties at her request. According to the appellant, therefore, this was a means of transferring the obligation, or delegating. The appellant referred to the text by Jean-Louis Baudouin, Les Obligations, 4th ed., Les Éditions Yvon Blais, at pp. 547 et seq. In a case of delegation, the delegate (the appellant) becomes the creditor of the delegator (the ex-wife) after paying the third parties (the delegatees). I think the appellant should actually refer to the concept of direction of payment, in which the creditor (the ex-wife) asks her debtor (the appellant) to pay what he owes her to someone else. In any case, I do not have to determine the legal nature of this transfer of obligations, if there was such a transfer, for the reasons that will follow.

The provisions of the Act which may apply to payments made to third parties in the case of separated or divorced spouses are contained in s. 60.1(1) and (2) of the Act. They read as follows:

60.1(1) Where, after May 6, 1974, a decree, order, judgment or written agreement described in paragraph 60(b), (c) or (c.1), or any variation thereof, has been made providing for the periodic payment of an amount by a taxpayer:

(a) to a person who is

(i) the taxpayer’s spouse or former spouse,

or

(ii) where the amount is paid pursuant to an order made by a competent tribunal after February 10, 1988 in accordance with the laws of a province, an individual of the opposite sex who

(A) before the date of the order cohabited with the taxpayer in a conjugal relationship, or

(B) is the natural parent of a child of the taxpayer, or

(b) for the benefit of the person or children in the custody of the person, or both the person and those children,

the amount or any part thereof, when paid, shall be deemed, for the purposes of paragraphs 60(b), (c) and (c. 1 ), to have been paid to and received by that person.

(2) For the purposes of paragraph 60(b), (c) and (c.1), the amount, if any, by which

(a) the total of all amounts each of which is an amount (other than an amount to which paragraph 60(b), (c) or (c.l) otherwise applies) paid by a taxpayer in a taxation year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, in respect of an expense (other than an expenditure in respect of a self-contained domestic establishment in which the taxpayer resides or an expenditure for the acquisition of tangible property that is not an expenditure on account of a medical or educational expense or in respect of the acquisition, improvement or maintenance of a self-contained domestic establishment in which the person described in subparagraph (i) or (ii) resides) incurred in the year or the immediately preceding taxation year for maintenance of the person who is

(i) the taxpayer’s spouse or former spouse, or

(ii) where the amount is paid pursuant to an order made by a competent tribunal after February 10, 1988 in accordance with the laws of a province, an individual of the opposite sex who

(A) before the date of the order cohabited with the taxpayer in a conjugal relationship, or

(B) is the natural parent of a child of the taxpayer,

or for the maintenance of children in the person’s custody or both the person and those children if, at the time the expense was incurred and throughout the remainder of the year, the taxpayer was living apart from that person

exceeds

(b) the amount, if any, by which

(i) the total of all amounts each of which is an amount included in the total determined under paragraph (a) in respect of the acquisition or improvement of a self-contained domestic establishment in which that person resides, including any payment of principal or interest in respect of a loan made or indebtedness incurred to finance, in any manner whatever, the acquisition or improvement

exceeds

(ii) the total of all amounts each of which is an amount equal to '/s of the original principal amount of a loan or indebtedness described in subparagraph (i)

shall, where the decree, order, judgment or written agreement, as the case may be, provides that this subsection and subsection 56.1(2) shall apply to any payment made pursuant thereto, be deemed to be an amount paid by the taxpayer and received by that person as an allowance payable on a periodic basis. [My emphasis.]

Counsel for the respondent referred to the Federal Court of Appeal judgment in Armstrong v. R. (1996), 96 D.T.C. 6315 (Fed. C.A.), at 6319 and 6320, where there is an analysis of these provisions. I cite the observations of Stone J.A. concurred in by the Chief Justice and Linden J.A.:

The view that subsection 60.1(2) applies can be dealt with shortly. In my view, the deeming provision employed by Parliament at the end of this section applies only “where the decree, order or judgment or written agreement ... provides that this subsection and section 56.1(2) shall apply to any payment made pursuant thereto”. No such statutory language appears in either of the court orders. It follows, therefore, that subsection 60.1(2) can have no application in allowing the amounts to be deducted from the respondent’s income.

In my view, the subsection 56(12) definition of “allowance” is to be read together with subsection 60.1(1) of the Act and the latter subsection construed accordingly. Accordingly [sic], as the former spouse had no discretion as to the use of the moneys they cannot be deducted by the respondent from his income for the taxation years in question. (Footnote omitted.)

The Tax Court Judge expressed the view that such a construction would render the subsection non-existent because a taxpayer who makes periodic payments “for the benefit” of a former spouse or children or for both, because such payments are earmarked for particular purposes, can never leave to the spouse a “discretion as to the use” of the moneys. If this be a difficulty it results from the clear language of the statute and, therefore, only Parliament could resolve it. (Footnote omitted.)

For s. 60.1(1) of the Act to be applicable there must be the periodic payment of an amount. [3] The payments at issue are not the periodic payment of an amount pursuant to an order or written agreement. Further, these payments must be in the nature of an allowance, that is, the recipient must have some discretion as to their use. The evidence did not disclose that the recipient had any discretion as to the use of these amounts.

Section 60.1(2) of the Act does not require that the payments be periodic. However, the last part of the wording of s. 60.1(2) of the Act requires that the presumption created by the subsection only apply if it is specifically provided for in the order or agreement. There is no such provision in Clause 14 of the agreement in question, the clause cited above.

The appeal is dismissed without costs.

Appeal dismissed.